Issuer officials who said Treasury's final issue price rules are a vast improvement over earlier proposals nevertheless raised concern that they might discourage competitive sales of bonds or create problems for issuers if underwriters run afoul of the rules.

Frank, Obama Team Push Muni Agenda

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WASHINGTON - President-elect Barack Obama's transition team is working closely with House Financial Services chairman Barney Frank and other lawmakers to make sure that municipal debt is included in the federal government's economic recovery programs.

Frank, a Massachusetts Democrat, introduced legislation on Friday authorizing the second $350 billion portion of the Troubled Assets Relief Program and clarifying that TARP funds may be used to purchase municipal bonds.

Frank told reporters Friday that "everything we've been doing has been in conjunction" with the transition team, adding that he speaks daily to Treasury Secretary-designee Timothy Geithner and other members of the Obama's economic team.

The Obama press office did not return repeated phone calls last week seeking comment on the administration's municipal market plans. But the muni provision in the TARP bill comes after Obama's transition team last year urged the creation of a "funding backstop" for the muni market similar to the recently announced Federal Reserve program for the commercial paper market, which has excluded tax-free debt.

On Wednesday, the Fed offered to make state and local government investment pools eligible for its Money Market Investor Funding Facility after months of refusing to respond to state and local government requests for relief.

Frank's proposed legislation explicitly clarifies that, under the Emergency Economic Stabilization Act, which Congress approved in October to authorize TARP, the Treasury can use TARP funds to purchase municipal bonds or to provide credit enhancement for munis that could be purchased under a Fed program in return for a short-term loan.

"The authority of the [Treasury] Secretary ... includes the authority to provide support to state and local governments, and other issuers of municipal securities, which are having difficulty accessing appropriate financing in the capital markets," a draft of the bill said. "Such support includes the direct purchase of municipal securities and providing credit enhancement in connection with municipal securities whose purchase is financed under any facility provided by the [Federal Reserve] Board or any Federal reserve bank."

Frank does not envision the credit enhancement functioning as insurance on the muni bonds, a congressional source said. Rather, the idea for the credit enhancement is modeled on the Fed's Term Asset-Backed Securities Loan Facility, or TALF. Under that program, the Federal Reserve Bank of New York has established a special-purpose vehicle to make non-recourse loans for at least one year to holders of certain triple-A-rated asset-backed securities. As part of TALF, the Treasury has committed to providing $20 billion of credit protection to the Federal Reserve Bank of New York in connection with that program.

But the congressional source cautioned that the bill does not stipulate how the Treasury or the Fed should go about purchasing munis or require them to purchase them.

The legislation is significant because until last week, neither the Treasury nor the Fed had indicated a willingness to help out municipal issuers, with Fed officials suggesting the governments seek help from the Treasury, and Treasury officials insisting that they ask for aid from the Fed.

Until last week, the bulk of the other Fed and Treasury programs remain closed to the municipal market, with the exception of a temporary guarantee program for tax-exempt and other money market funds.

Matt Fabian, managing director at Municipal Market Advisors, said the legislation comes after issuers have lobbied the federal government to buy munis to effectively replace the demand hole left by tender option bond programs.

Meanwhile, Michael Decker, co-chief executive officer of the Regional Bond Dealers Association, said the legislation was important because it "makes it clear beyond any doubt that TARP is intended to benefit the muni market."

At his press conference Friday, Frank stressed that he planned to address the problem of "full faith and credit municipal bonds [that] are as safe as Treasuries [but] have to pay a much higher premium." He said his committee would "deal with that" issue, but did not elaborate.

A spokesman for the Treasury Department and the Fed declined to comment on the muni portion of Frank's TARP bill.